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Transcript: Season 1 Episode 5 – Passing your assets to the next generation? The risks might be closer to home

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Martin: Welcome to the business owners podcast where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts and I am here with my colleague Ed Skilton and together we represent Mills Oakley’s Private Advisory Team. Hi there everybody and hi there Ed!

Ed: Hey Martin, how’s things?

Martin: Very good, I am delighted to be back, yet again! Episode five!

Ed: Yeah, likewise, you look a bit anxious,

Martin: Look, I am as always at this early stage in the show anxious Ed, I just need to get the disclaimer of my chest, will I do that now?

Ed: Please do.

Martin: This podcast contains general commentary only and is not a substitute for independent professional advice. Always seek specific advice related to your circumstances before looking to implement any of the strategies referred to in this podcast.

Ed: Shake it off.

Martin: That’s it, thank you very much I can relax and concentrate now, hey look it has been a great journey so far, the positive feedback has continued to flow in, we haven’t had a major sponsor come in and look to take out the show yet, which disappoints me (Ed laughs) and on a personal level, but, who knows, maybe by Episode six that might happen. Lots and lots of really nice emails from business owners, appreciating the commentary and the education and appreciating the opportunity to go a little bit deeper in a way that they don’t get, you know through the normal meeting or phone call with us.

Ed: Yeah, look I got a funny email actually, from Jackie in Tassie, do you remember I told you about that?

Martin: Oh Jackie! Yes, I do remember her,

Ed: Yeah, well most people send in questions or sort of feedback, she just sent this really blunt comment, she said “that Wayne needs to man up and grow a pair”. (Martin laughs)

Martin: Jackie! That’s pretty full on.

Ed: That’s a bit rude. (Martin laughs)

Martin: Anyway, you might remember Wayne, our millionaire businessman client, he has been into the studio most weeks and we have been tracking through a journey that he has been on, a journey in relation to asset protection and succession. And we are now at episode five of a six episode series, so close to the exciting denouement of Wayne’s situation and close to finalising our asset protection and succession strategy for him, so very brief recap; Wayne is a successful businessman. We started off by sorting out his asset protection needs, we helped him buy a home for his son and we managed to structure that up in a way that protected that home. We then helped do a similar task for Wayne’s business, we restructured the company such that the shares in his valuable company were taken out of his own name which was bad for asset protection, bad for tax and we structured those shares into a family trust, for which Wayne was very, very grateful. We then moved into a broader more free ranging discussion with Wayne where we really just started to talk about the future, about his goals and aspirations as he moves into the later stages of his life; from retirement to ultimately his plans where he passes on and that was a very, very interesting discussion. Ed, do you want to kind of summarise where Wayne is at with that?

Ed: Yeah, well look, Wayne is going to require some income from the business in his retirement, but he was passionate about the business staying in his bloodline, and when I say the business, the business name and also the financial benefit of the business. One thing he really didn’t want to happen would be that his son’s wife could walk off with some of his business in the event that they separated and look people have different views on that risk, he was very concerned, it was very important to him that that should not happen.

Martin: Yeah, and look, the client’s that we see in our practice have myriad needs and goals and aspirations and some of them are quite different to Wayne, what they want to do is actually build up a saleable asset, sell it and then help their kids through the sale proceeds, or give their kids nothing, or anything in between. But Wayne’s scenario is also one that is fairly common that we see. People, quite understandably are very invested in their business, it might be a family business that has already passed down the generations, it might be a second, third generation business, and what they want to do is to protect it in the context of transitioning into the next generation. And so certainly that is where Wayne is at and it brings its own challenges. So what we have just done this morning and again we decided to not bring him into the studio because boy it was an exhausting session, but we spent three hours with Cameron, Wayne’s Son. Because we just thought that it was really important to get Cameron’s perspective on this, so often we see business owners have a plan which is in their minds or it might even be documented, it might be very well documented, but they have forgotten one crucial thing which is talk to, or get somebody independent to talk to, the other important people in the plan and to make sure that there is a meeting of minds and so that is exactly what we have done. So look Ed, do you want to lead off, tell all our listeners how we went with Cameron, and yeah, some of the very interesting things that he told us.

Ed: Sure, it is a really challenging project. Cameron, bless him, was very open with us. In terms-

Martin: And we are just going to disclose those secrets openly on the radio now, we don’t care (Martin laughs).

Ed: So Cam told us that he works well in the business, Wayne has told us this as well, but he says that Wayne won’t really give him a chance, so even if there is some talk about control, handing over, really Wayne is not going to let go.

Martin: And hey Ed, isn’t this common, you know, this is the old conundrum isn’t it, business succession, is Dad or Mum willing to let go, and is son or daughter ready, willing and able to step up and isn’t this so often the flip side of what the parents tell us.

Ed: It really is and then the overlay here is it’s not just about Cameron it is also about his spouse and Cameron took a while to open up on this, but boy, he told us some things that I almost wish I didn’t hear (Martin laughs).

Martin: But we are going to disclose them anyway.

Ed: So one –

Martin: But surely we can’t have any liability now, we fully disclaimed (Martin and Ed laugh).

Ed: Now, we discussed with Cameron around controlling the business, the wealth, and hat he said to us was that there is a lot of pressure being placed on him by his wife to get an early inheritance, now that can sound very negative, it’s not necessarily negative because he has worked in the business, maybe he is owed something, you know –

Martin: Well that is a charitable interpretation there.

Ed: Well, maybe he is, you know what it is like, people don’t always get paid properly for their efforts when Dad owns the business, now, he was saying it was an issue, he was worried that his wife is putting pressure on him, so what does he do?

Martin: Well, and here is when it gets very, very interesting. I think it is fair to say that Cameron and it took a while to kind of get this out of him, Cameron has been concerned about his wife for some time, it started off with her spending habits, she liked often to go on shopping trips with her sister and I am not talking about to the local shopping mall, I am talking about five day thumping the credit card in Hong Kong, New York and other such centres, that has really been playing on his mind, particularly as he’s wife Angela comes from nothing, you know, this money is only coming from the one side of the family,

Ed: Yeah, I think it is fair to say that he feels it is unsustainable if he stops earning money, what he did, however, was to have her followed, because he wanted to know how all this money is being racked up and how this is happening between her and her sister and of course, he then decides to follow his wife and her sister to a hotel, to find out what is going on, only problem is he saw them meeting up with two men.

Martin: That was a painful moment for Cameron. And he told us he doesn’t know what happened there after, so look, you know, it could all be innocent.

Ed: It could be a surprise party for Cameron.

Martin: Yeah, but Ed has his suspicions, as do I, I think it is fair to say, so look where it kind of went from there is that, you know, yes Cameron wants the business, he desperately wants it, he has put his blood, sweat and tears into it over many, many years and he has really done so on a rubbery promise from Dad that one day he is going to inherit the earth. But now he has got another problem, and it is the problem in fact that his Dad has also been worried about, all of this time, and it becomes very, very difficult, because he has kind of got to admit to Dad that Dad was right. He has got a problem with his marriage, so it is about how do we now navigate this conundrum, how do we get the asset from Dad to Cameron, but how do we protect it from the matrimonial claim.

Ed: Look, we will have to raise these things with Wayne in a sensitive way, but is not the only risk, ok that is the risk that has been brought up, but it is still not the only risk, all the other risks around creditors and decision making and growth of the business versus trying to realise the value in the business, these things are all still there, so it is not a de-railing of the plan, but it does bring into focus one of these risks, and we are going to have to flesh this out with Wayne at some point over the next week and then try to finalise this strategy.

Martin: Yeah, so we have done the consult, we now intimately understand father and son’s perspective, we have got some really, really useful information from the discussion with Cameron, so we are going to leave you with a tantalising cliff hanger, we are going to come back next time and we are going to provide the detailed blue print plan for Wayne and his family to move forward, so stayed tuned in for that one. But in the meantime, as always, we are going to conclude with our soap opera “Business and Pleasure”, so Ed, I am going to hand it over to you.

Ed: Thank you Martin. Recapping of the characters here, Gino who is aged 60 and owns the Coffee Shop “The Moral High Ground”, selling ethically sourced coffee beans, Gino has been diagnosed with an illness, he is very worried about what would happen in his incapacity or death. Gino is married to Lena, also aged 60 and Lena is Gino’s second wife, Gino has two kids from his first marriage. David who is 32 and works in the business is married to Annie and they have got two young kids. Emily who is aged 26 is a de facto relationship with Samantha, Emily doesn’t work in the business. And Lena and Gino have an 18 year old daughter between them named Susan who is a student. We have spoken previously about this blended family conflict that can arise in the context of succession planning. Recapping on what we have done, the self-managed superfund that Gino has got, now holds the commercial property. The business premises have been transferred from Gino’s name into the self-managed superfund, he can now start receiving tax free income and the gains can also be tax free if he ever sells the property. We have looked at separating out his self-managed superfund into two funds. One, that he co-controls with Lena and invests. The other one, that holds the business premises. We were talking about what would happen if he passed away, making sure he has nominated the right beneficiary, or got the right controller in place to decide to whom the benefit should be paid if he passes away. This week I want to talk about other members in the fund. So let’s run with this idea that there are now two self-managed superfunds. Maximum number of members is four. He has got five people in the family. A lot of people would say make kids a member of the fund, others will say don’t bring the kids into the fund, whatever you do. I am going to put my money on their being two funds, one that is really for Gino and Lena and the other that has got the business premises and that is really for David. The only problem here is that Gino wants all three kids to benefit from the business premises, even though David is going to get the business. So let’s fast forward into the future and imagine this scenario. David owns and controls the business and he needs to use the commercial property to run his business. That commercial property is owned by, let’s say, SMSF Number 2. SMSF Number 1 is controlled by Lena and Gino. They are both members of that fund and they run that together and Gino is happy to let Lena control that if Gino passes away and Lena will decide who gets all of the money that Gino has got in Super. She might pay herself, might pay her kids – that will be her decision. The SMSF that has got the commercial property – does he make all of his kids members or just David or none of them? Why would he make any of them members. I will tell you why. The reason he might do that is that if he passes away he wants one or more children to automatically have control to decide what to do with that property. In the absence of a binding Death Benefit Nomination form, or frankly, even if there is one and he wants to make sure there is not going to be a dispute, he needs to make sure the right people are in control. If he wants David to get that property make sure he is a co-trustee or a co-director of the company that is the trustee. He should really make him a member, therefore, to give him rights to be a trustee or a director of a corporate trustee which means David has to have a small member balance, at least, but is there a benefit in David getting more money into super, or the other children getting more money into super? Why do you hear this spoken of, why make kids members of the funds. Well one of the reasons why, is that as lawyers, when this problem has come to us when someone has passed away, the client says “we have got this property in a self-managed super fund and it was brilliant because you know it is taxed really effectively and it is safe in the super fund from creditors, you know, it is really, really great having it in there and we control it and we have got the lease and everything. But now Dad has died, apparently the property has to come out of the fund. Look that’s right, someone passes away it is a cashing event you have got to pay out the benefit and if it is all in a property you have got to pay out the property.

Martin: So that is a big point Ed, the property cannot stay. Is that right, it cannot stay in the fund after Dad’s death.

Ed: Even if it goes to an adult child it has got to be paid out. You have got to pay out the benefit to the adult child, no asset protection.

Martin: Particularly as David, who may be the beneficiary, he is now a business owner in his own right, okay. So Dad dies, the property comes out of the fund, bang! It’s in David’s name and it is exposed to trading risk.

Ed: So what would David prefer? Let’s say we spoke to David and he said “I really want to keep that property in this self-managed superfund because you know what, in a couple of decades, I will be thinking “I wish I got the property into the super fund. One of the strategies that our clients will use is to make sure there is enough money in the fund by the kid’s contributions to pay out cash instead of paying out the property. Because you look at this big picture, let’s say the property is worth a million and there is nothing else in the fund, Gino dies, you have got to pay out the property, sell the property pay out the money or distribute the property. Let’s say the property is worth a million and David and maybe with the help of his sisters, is able to get another one million of contributions into the fund. When Gino passes away it might be possible to pay out the other contributions and leave the property where it is to make sure that the dollars’ worth of Gino’s entitlements have been paid out but the property is still in the fund.

Martin: It is a really good kind of cross-over between an effective asset protection and tax strategy, but also financial planning right? Clearly, as lawyers and I am going to throw up another disclaimer, we cannot and do not give financial advice, but it seems to me that if you brought a financial planner into this mix, what a dream team, you know, the planner can help David and his siblings to invest through the SMFS with some other assets, you are going to have some diversification in terms of the asset allocation and then when Dad passes on, we can actually maybe keep this property asset in the fund which is probably exactly where we want it to be.

Ed: It is a really good point and at the planning stage, when you have to work through is ok, for Gino tax free income is incredibly powerful, very attractive, so we are thinking try to contribute the property into the self-managed superfund in Gino’s column, you know, his member balance. But if David, maybe David’s sisters as well have the intention of building up wealth in the self-managed superfund, before this property was transferred, if we knew that then maybe what the suggestion would be, it would be something like, David and his sisters borrowing money through the super fund to acquire that property from Gino.

Martin: Wow!

Ed: And so when Gino passes away, well no, it was David and his sister’s entitlements in the fund, they owned the property via superannuation and not Gino, so Gino passing away does not impact at all on that fact, now you can borrow through a self-managed superannuation fund, there are lots of rules, with all good things, there are lots of rules, but borrowing to acquire the business premises is a legitimate strategy that really it would have been great if Gino discussed with the children before he contributed that property into the fund.

Martin: Again, it is all about communication isn’t it? It is about what does everybody want. Does this suit Gino, does it suit the kids, because if it does these planning opportunities are phenomenal, I mean, Ed on the other side of the ledger is there any down side in the sense that would any of the children for example, feel nervous about being in a superfund with their siblings or with their father.

Ed: Some people like the idea of family controlled wealth and helping each other out and keeping it together, sort of a “together we are stronger” idea, other people can’t stand the idea and they think the last person in the world they want to co-own assets with would be a sibling. And there are no rule s on this. Either you buy into the vision, or you don’t. If the vision is we are all independent and money is not important between us, you know, we look after our own and you know we don’t need to talk about money ever and in fact it is better if we don’t, then don’t go into a superfund together. If, however the way the family works is its shared money, it is family money, the family business spins off some money, we work in the family business, we invest together, then there is a chance it’s going to work. Most families can’t make that work, they can’t make it work because either they don’t trust each other, they don’t communicate properly or they just don’t like the idea of owning assets together. If that’s the case, borrowing via super to acquire the asset seems like an even better idea because David on his own probably can’t acquire that asset without borrowing. With his sisters, they could probably acquire it without borrowing.

Martin: So, as with many things I guess it really comes down to the discussion and not to jump straight to the technical, but really to work through this discussion as a family and the strategy really follows from there.

Ed: Yeah.

Martin: Well that’s great Ed, you have really turned me around on this Business and Pleasure thing, I started off deeply cynical but, boy there have just been some fantastic insights and I will very much look forward to the concluding episode next time. So, look thanks everybody for listening, again we hope that you have got something out of today, if you would like some clarification or further information, by all means contact us, we would be delighted to assist. So thank you everybody and until next time.

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